Do You Target The House, Or Target The Price?

I’ll ask the question, but it’s almost rhetorical, since you know I’m going to give you my answer and explain why.

Some buyers in this market are targeting types of houses, and making offers at their comfort level, hoping to “win” one eventually.

Other buyers are targeting properties at which they feel they have a chance to “win,” given their affordability.

Let me explain which of these is the proper method, and why the other makes absolutely no sense…

When you approach your real estate search, would you say you’re more like Ben Stiller, or Owen Wilson?

Laugh if you know where this is going…

Remember the 2004 remake of “Starsky & Hutch?”

Remember how painfully awkward some scenes in that movie were?

The first time I saw the movie, it had some great moments, but on the whole, it wasn’t very good.

I remember saying, “It’ll probably end up being like Zoolander or Anchorman, in that you won’t like it the first time you see it, or the second time, but by the third time, it’s etched in your brain forever, and it’ll go on to be a cult classic.”

I think we can all say that’s true of Zoolander and Anchorman.

But in the end, and after having seen it three times, I can tell you that nothing changed for me. That movie just sucked.

There is one line from the movie, however, that I’ll always remember.

It’s hilarious in its intended form, but it’s also metaphoric, and I’ve found myself using this in many other arenas of life.

Take a look:

That never gets old.

And they picked the right character for each line too.

So let me segue back into today’s blog post, and hopefully that movie clip will make sense.

If you’re a buyer in this insane market, and you’re looking for the holy grail of real estate – the freehold single-family home, would you, as Owen Wilson put it, “Just take anything?”

It depends on your situation, of course.

I have clients buying with a 7.5% down payment, who want the best house they can find for $999,999 or less. And I have clients who are buying in cash, and will take a house at $1M, $2M, or $3M, depending on what they get for their dollar.

But if you find yourself in the first camp, and you have serious restrictions on what you can spend, do you:

a) Bid on houses you like, regardless of your chance of getting them, until you “win” one?
b) Specifically target houses that you think will fall in your price range?

You know where I’m going with this one.

I’m always shocked, when I’m on the listing side, at the person who bids the list price when there are nine competing offers.

It makes no sense, but it happens, and it will continue to.

The market is not perfectly efficient, and thus there can be what we think the property should sell for, and what it could sell for.

Last fall, I had a conversation with a “big-time” listing agent, where we could not have possibly disagreed on strategy with regards to working with buyers in this market.

My clients were the tough-luck 7.5% down payment buyers, meaning they were looking at every house with a maximum of $999,999.

Every week, we would see 2-3 houses that had potential, and it was a matter of waiting until offer night to see what the action was like.

A house listed at $799,900, with three offers, could work in our favour.

But a house listed at $799,900, with fifteen offers, would undoubtedly go over our $1M ceiling.

As I said: the market is not perfectly efficient. There are often large fluctuations in price potential and actual.

Offers could be reviewed on the night of a massive snowstorm. I sold a house to a buddy on Cranbrooke back in early 2016 for $1.8M that “should” have sold for $2.1M, but there was a massive snowstorm that night, the city was chaos, and in the end, I had the only offer.

Offers could be reviewed on the same night as another similar property, or two, or even three when the market is busy. I’ve seen this happen before, when the buyer pool is split among a number of houses in the same price point, in the same geographic area, and usually one of them craps out, or sometimes all of them sell for moderately less than expectations.

And on the flip side, offers could be reviewed in a week where absolutely nothing else hit the market, and every buyer is lining up for that one house.

So last fall, I had lost on bids with my buyers on two houses – both in Leslieville, that sold for over our $999,999 ceiling.

We knew that eventually we would find a place, but we just didn’t know which one.

Most buyers have a “soft cap” on their bids. They “want” to spend a certain amount, say, $1,100,000, but they end up bidding $1,125,000 on offer night, and when there are twelve offers and it’s down to only two – them and one other, they make that push to $1,155,000 to tie it up.

But my buyers had the hardest of hard caps. They simply couldn’t go any higher.

On one particular night, there were three houses taking offers, all of which could work for us (times have changed, eh? three options in a single week?), and I was trying to figure out which would have the most interest, and which wouldn’t fall to us under one million dollars.

There was one house, that I honestly thought could get $1.1M or $1.15M, that had only one registered offer at 5:00pm, so I called the listing agent to dig a bit further.

I asked her for a copy of the home inspection, and that’s when things got………weird.

To this day, I still can’t figure it out, and I’ve thought about this several times since then.

She said, “You’re calling me at 5:00pm on offer night, asking for a copy of the inspection?”

I told her that my clients were through at the open house, and they looked through the inspection at the property but wanted to look at it one more time.

She said, “Will you be coming in with an offer?”

And I told her, “I’m not sure yet. It depends on what the action is like.”

She reiterated that she didn’t understand why I was asking for a copy of the inspection two hours before offers, and complained that she had to go home, change, drive to the office, and prepare for offers, and that she didn’t have time to send it to me.

I said to her, “I don’t need a paper copy,” not trying to be facetious, but to point out the obvious. “You can just forward a PDF from your phone.”

“Why don’t you call your clients, and see if they want to offer, and if they do, then I’ll send a copy.”

It made no sense to me, and I told her that.

“Don’t you see how we would like to see the inspection before we decide to offer?” I asked her.

Then I simplified it a little bit.

“This is me, we’re talking about here. You know me. We’ve done deals together before. I’m not a fly-by-nighter, you and I are both top agents, what am I missing here?”

She then said, “There’s a lot of agents out there collecting home inspections, and I don’t like it.”

Again, to this day, I have no idea what that meant, and perhaps this isn’t really central to the theme here, but I wanted to lay out the entire conversation for context, as we get to the crux of today’s discussion.

I then said, “All I’m asking for is for you to click ‘forward’ on your phone, let my client look through the inspection, see what the action is like at 7pm, and then decide if we’re coming in.”

That was her “a-ha” moment, and she pounced on it.

“What do you mean ‘see if you’re coming in?'” she asked.

“Are you, or aren’t you?”

I had nothing to lose; no hand to show. So I told her, “We can only go up to $999,999.”

I thought that was a conversation-ender, not a conversation-starter.

“So what?” she asked. “What does your affordability have to do with the offer?”

That made absolutely no sense to me, and now she and I were getting into it.

“It matters,” I told her. “It’s the entire matter. Why would we bid on a house that’s going to sell for far more than we can afford?” I asked her.

“Because that’s what you do. You pick a house, you like it, you bid what you can afford. If you get it, great. If not, you move on.”

“No,” I told her. “Absolutely not; that’s not how it works in this market. We’re looking at three houses tonight – yours, Woodycrest, and Pretoria. We’re looking for the one that might sell under a million dollars,” I explained.

“Well David,” she told me matter-of-factly, “That’s just not how it works. You pick the house, not the price.”

“Well,” I told her right back, as I desperately tried not to make it personal, but clearly failed, “I do fifty buy-ends a year, and I’m telling you this is how it works.”

She fought right back with, “Well I’ve been in the business twice as long as you, and I’m telling you, aa-gain, that it’s not.”

The conversation ended somewhere around there, and by 7pm, she only had four offers, but the property still sold for over $1.2M.

We ended up buying another house for, you guessed it, $999,999.

But I looked back at that conversation so many times last fall, and even more so into 2017.

I still think that her logic is flawed in this market.

I think it’s misplaced, and belongs in a completely different market, where the ratio of buyers to sellers is balanced, and where supply is much higher.

Picking the house you “like” and then seeing if you can afford it just isn’t a luxury we have in this market.

It’s like the buyer client working with a $900,000 budget, who constantly sends you MLS listings for properties that are priced at $899,900, with a hold-back on offers. You know these are going to sell for $1.1-$1.2M, and you’ve told her that before, but she still keeps sending them.

“These are the ones I like,” she always says.

Life isn’t like that.

And nowhere is that more abundantly clear than in the 2017 Toronto real estate market.

In this market, you have to look at what you can afford, figure out the house type, style, size, and location that will fall within your affordability range, and target those properties as they hit the market.

To look at “houses you really, really like,” ignore feasibility, and hope one day you can find one at your price level, is like continuing to cast your fishing line in a pond with no fish. You’ll just sit there, and time will pass you by.

Except in the real estate market, time is a currency. As time passes, prices increase.

So if you’re an active buyer in this market, learn this lesson now, instead of after you make three offers at $900,000 only to see those houses sell for $1.2M.

24 Comments

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Tredsays:

You seem to have been around as a real estate agent so I am surprised at your post and your reasoning here. I was a buyer in a crazy spring 2016 market and lost a dozen before buying but I got the hang of how agents work. The lady you had that conversation with does not care about anything other than how many offers she will be looking at on the offer night. She does not care what your strategy is or whether you bid only on one you have a chance of getting. Out of 4 offers she got I bet 3 were just like yours was going to be and only one was above a million. In fact I built a math model when house hunting instead of going by agent reasoning.

The whole RE industry in Toronto is designed to screw the buyer and inflate prices. Blind bidding and massively under priced houses do nothing more than inflate an already massive bubble in Toronto. Government needs to change this asap.

I have said this before here, I think one should always target the price and work backwards to allow to outbid others and still be within budget. For those money no object clients they can obviously look for the right house and bid whatever it takes to secure it, but most of us are not in that situation. Of course it’s difficult when you can’t get a house within budget but unfortunately, that’s reality. Either be prepared to move out or down the food chain.

I think that this is more true at the 999,999 price point. When you are going higher or have the option of 20% down this does not fall under the same criteria.

Another look at the same argument: My wife and I were discussing our house and the potential resale value in the future in regards to how much we should spend on renovations before there is a diminishing return. Our house is a 3 bed 2 bath with no parking in a decent neighbourhood. I said that it may not make sense to put the money in as we don’t have parking and that will limit our selling price.

My wife, correctly I believe, said that buyers no longer have the choice to discriminate whether or not they get parking. Too many people are trying to buy, so buyers are taking what they can get and giving up on the non-essentials.

IMO, it’s targeting the price now. There’s a huge premium to be on the subway line as it compensates for not needing a car. Not many want to take the bus. So that $20K for a new car, people would rather finance over 30 yrs a 150K+ premium to not have a car. Consequently, the average starter person is priced out in the house that they want.

Therefore, they are moving on outwards.

So the sweetspot of 650K-850K for very entry level to more mid-seasoned professionals will spread all throughout the GTA as long as it meets the detached, 3 bedroom criteria. Any place that has ‘matured’ is seeing huge premiums for anything that sells, so people are on the hunt that meets their budget in areas they never expected.

She had no obligation to David or his client. Her job was to get the best price for her clients; if that means putting bidder against bidder then so be it.

David’s job was to help his client purchase a house. His job included crafting an offer that would be appealing to the Seller, not the money and dart-board technique of seeing throwing out offers and seeing which one would have stuck.

Take an extreme example; when Conrad Black’s house went up for auction you needed to post a $250,000 in certified funds,at the door to get into the auction. You couldn’t see who else was in the room and then decide. You weren’t allowed to wait until the auction started and then decide if you wanted to participate. That sucks for those who weren’t ready to plunk down $10,000,000+ on a house but it made sure that the Seller didn’t have to waste any time with bids that would never materialise and other Buyers didn’t get pissed off at the price being driven up by people who couldn’t afford to play in the space.

It sounds like Davids clients didn’t have the funds to secure a mortgage without insurance as such David should have included a financing clause that would allow the Buyers to ensure that they can get a mortgage on the house that they are bidding on. If that was the case, there was nothing stopping David from submitting three bids all with financing conditions and giving his clients an out. In this market bids with conditions would most likely be rejected but better to lose a house that way then to have the “winning bid” only to find out that you’re bank is no longer there.

Picking the price and not the house is another way of driving the prices up and making people spend more than they should. I think real estate agents have manipulated their clients to over bid. The Agents are making their clients feel that if they don’t over bid on a property they will lose out on the deal So It’s the fear of losing that motivates overbidding rather than the joy of winning. This tells me that all the Agents are colluding to increase prices and subsequently profits by using the so called lack of inventory to drive the prices up.

Yes a successful (buyers) agent will get their client to out bid and over pay or else it’s no deal for them.
I wonder how much of this price appreciation is accredited to buyer agent get their client to out bid, when you consider there are 40,000 agents in the GTA the competition to have the successful bid must be brutal.

The metric I would be interested in is what is the average number of houses a typical buyer bids on before they are successful. For a successful agent like David who does 50 buy side deals per year, if he can get the house for his clients on the first try vs on the 3rd that’s 100 less offer nights for him. There is an obvious incentive to close the first time especially if he could close other deals on those nights i.e. each unsuccessful bid comes with a pretty hefty opportunity cost.

The incremental commission is probably not worth it, but the extra work/opportunity cost definitely does.

Luckily the buyers interest aligns with the buyer agents. None of them benefit from throwing offers around. Waste of time for the agent and with each offer you put in on a house that you most likely won’t be able to get you increase the final sales price. That sales price (correctly or not) will be used as a comparable to price the next listing. That means that the buyers of that next house are expected to pay more as the previous comparable house sold for. Ie. with offering for houses that you can’t afford as a buyer you are making yourself a disservice. David is bang on with his approach. Best use of resources.

Maybe the listing agent wasn’t having a discursive conversation on the theory of buyer bidding strategy — she just wanted your buyers to attend that listing on that night to drive up the price. Maybe when she’s acting as a buyer agent, she thinks just like you.

I agree with Ralph, she is likely just trying to get another bidder to show up as it helps her cause. Or it is quite possible that she is the type of Agent who simply tells her buyers to pony up more, their budget be damned.

Read this line again:
“It matters,” I told her. “It’s the entire matter. Why would we bid on a house that’s going to sell for far more than we can afford?” I asked her.
“Because that’s what you do. You pick a house, you like it, you bid what you can afford. If you get it, great. If not, you move on.”
“No,” I told her.

David is trying to get his clients to bid on houses they probably can’t afford and she’s telling him to have his clients find a house they like and bid what they can afford.

You’ve got some experience in RE, you know that once you put in a bid it’s easy to fall victim to bidding more than you anticipated. You submit that offer and you start talking about what colour you’re going to paint the kitchen and how great it’s going to look with that herringbone backsplash. Agent comes back to you and says that you’re going to need to up your offer ten-grand. You hum and haw, that’s more than you wanted to spend but it’s only another $30/month and you think that if you take your lunch to work a couple of days a week that’s no problem. Agent comes back a couple more times and next thing you know it’s an extra $300/month, you’re bagging your lunch everyday, kids are out of Montessori and you’re going to spend the next ten years having you in-laws talk about how you should join them for two-weeks in Florida at their one-bedroom condo.

I agree with the Selling agent, bid what you can afford. Maybe you don’t get that house and you have to pare back your expectations but you’ll be better off in the long run.

Nope, Mike, you completely missed the point.
These guys could not bid more than 1M even if they wanted to. Legally they would not get financing.
And putting in a condition makes the offer a throw away. Why even bother?
No, they wanted to make their bid count. Assume they liked all three houses equally. Why would they not bid on the one they have a shot at winning?
And the agent was absolutely trying to divulge her own price. Which she should to benefit her clients.

“You pick a house, you like it, you bid what you can afford” – while I understand this point of view (although, given the current market in Toronto, I certainly do not agree with it). But as you noted, you were looking at THREE houses – and you have one shot. I can’t fathom why she didn’t recognize that you had to pick the house that your clients had the best shot at winning.

David , you’re a great realtor who has values and know your shit. But a couple of things in this article disappoint me on realtors :
– you took offers and convinced your seller client to take an offer that was $300k less than what you thought he could get because the weather was bad that night? Why didn’t you relist the property ? I’d be pissed if I was the seller
– the laziness of some realtors who are earning tens of thousands to forward a copy of the inspection report to a potential buyer because of her past experience or whatever reason ? I’d be pissed if I was the seller

The selling agent probably made the right call not forwarding the inspection — maybe for the wrong reasons, and she could have handled it more tactfully…

She knew that the buyers had already seen the report. If there was anything major wrong in it, they wouldn’t still be considering bidding. And you NEVER discover an extra positive thing on rereading an inspection report “Look honey, it says there’s a chest of Aztec gold buried under the basement stairs!” They were looking for some small reason not to bid. You have to weigh that against the perception when you refuse to provide a copy, and not wanting to pander to collectors of inspection reports probably wasn’t the best excuse to have given…

Although I have in the past wondered what happens to all those PDFed home inspection reports, and how they could come out of the woodwork to be used in future rounds of bidding should houses go up for sale again in the short or medium term.

TWEETS

The preceding commentary is the opinion of David Fleming and does not represent the interests or opinions of Bosley Real Estate Ltd., Brokerage or the Toronto Real Estate Board. Therefore, Bosley Real Estate will not be held responsible and/or liable for any of the opinions herein.